Successful marketing and sales campaigns lead to new business challenges.

EMS providers are doing quite well, thank you. As the US economy continues to improve, and the undertow of the “Made in America“ label gives notice to OEM marketing staff and end-consumers, the American EMS industry is on a roll. EMS companies are reporting healthy upticks in revenue. With such growth comes increased profits, and with profits come plans to expand capacity. This path is fundamental to any business journey, yet it presents new twists specific to today’s industry.

With factory expansion comes the time-intensive task of filling the added capacity. It is a given: The successful Tier 3 EMS will extrapolate its marketing plan.
Logically, EMS firms will increase sales staff and step up promotional campaigns. All is well as the Tier 3 EMS continues familiar strategies to increase business through multiplication. Lurking in the business shadows, reality is causing turbulence, however. These unforeseen matters will eventually require Tier 3 EMS companies to step outside their operating comfort zone.

BIGGER THAN THEY LOOK  With the proper strategy, the Tier 3 EMS can act as a feeder to high-volume partners offshore.

Territorial Limits

The business of Tier 3 EMSs is traditionally tied to its locale. Location, location, location is the phrase associated with real estate, and now on loan to Tier 3 EMS businesses. Typically, a high percentage of Tier 3 EMS business is spawned from an area a radius of 120 miles, or approximately two hours by car from the factory. We can define this as the “reachable sales territory.”

Challenge #1. The reachable sales territory has a fixed number of OEMs to target. The EMS in operation for 10 years or more likely has approached all the appropriate potential OEM customers in its striking territory. Presumably, sales efforts to initiate business with the majority of these prospects has failed. This makes future outreach difficult and mining new business unlikely, given virtually the same storyline of capability.

Challenge #2. Over the past five to seven years, the (mammoth) Tier 1s have reached downward in market scale through acquisitions and changes in scope to compete with local, small cap OEMs. The EMS industry has witnessed Tier 1s broadening their range of operation to the extent of taking on NPI programs, incubating small cap development groups and investing in newly christened startups.  Without question, Tier 3s have lost business to Tier 1s due to the lure of Tier 1s’ global mass production locations, material acquisition strength and over-the-top legacies. The size and background are alluring and give credibility to OEMs’ decision-makers when selecting EMS providers.

Challenge #3. The era of cold-call sales activity is dead. Initiating sales discussions is no longer a straight path thanks to the impenetrable defense designed to ward off robocalls, offshore magazine subscription calls, spam emails and the common business practice of ignoring all voicemail introductions. Today, initiating contact through conventional sales activities of phone or email is akin to a Hail Mary pass in football. Tier 3 EMSs that have little to no market recognition will have a tough time accessing potential customers without some means of differentiation from competitors.

Depending on the scale of the EMS facility expansion, filling new plant capacity can take a year or more. Over the period of necessary sales catchup, new factors impacting the EMS industry will change the dynamics of the business plan, such as health of the economy, industry trends and technology advancements. Hence, bottom-line financials during the period of sales catchup will cause negative bottom-line burden. A predictable and oft-asked question during any Monday morning EMS management meeting is how do we expedite new business to match our increased capacity?

This esoteric question illuminates the Tier 3 EMS firm’s best strategy to break away from the confining reachable sales territory and its once (but no longer) successful marketing programs. Once successful, but now struggling, Tier 3 EMS providers should consider the following solutions:

Solution #1: Recharge the sales representative network. Without hesitation, we assert sales representatives are most valuable to EMS firms in the Tier 3 space. The EMS business is long, arduous and fleeting, however. Experienced sales representatives have had their time in the EMS ring, and for a variety of reasons most come out on the losing side. A fresh approach to attracting experienced sales representatives is necessary.

To draw desired sales representatives to the Tier 3 EMS’ program, a sales representative agreement offering an absolute low-risk engagement is to be offered.  The agenda of the sales representative agreement is to encourage, but not deter, the investment of the sales representative’s time, work and uploading of their cache of coveted OEMs.

Recommended contents of a sound sales representative agreement include:

• Eradicate the ubiquitous “termination without cause” clause. This clause is found in most rep agreements and is indeed a discouraging license to an unjust EMS provider. Without this clause, sales representatives would be less concerned about the risk vs. reward proposition and more willing to invest their time, money and cache of customer relationships.
• Guaranteed minimum commission. Commission rates are invariably attacked for programs considered to have low profits. Linking EMS internal profits to sales representative commissions is a debatable subject. To mitigate the potential for this rather unsavory policy, the sales representative commission is to be broken into two buckets: profitability and overhead. Percentages can be negotiated. Profitability can be measured by gross margin (sales price vs. material acquisition cost). Overhead (yes, even sales representatives have overhead burdens) can be a fixed percentage buried in the EMS firm’s overhead equation. The agreement must also have provisions to address full turnkey, hybrid turnkey and consignment, and full consignment cases with the same caveats of profitability and overhead considerations.
• All sales representative agreements are to be written under US law. Even if the EMS has overseas ownership, operation or affiliation, the agreement must be under US jurisdiction. This gives the sales representative a comfort zone, knowing disputes won’t be settled in difficult, and sometimes biased, international courts.  
• With the option given to the sales representatives, the sales representative agreements should invoke the American Arbitration Association to settle disputes. This will offer the rep a platform to resolve a dispute by minimizing the inequality of legal budgets between the EMS and these sales representative entities. Without the AAA as a fallback, the EMS can turn litigation into a cost-prohibitive process for the sales representative. The AAA adds more confidence and comfort to the sales rep considering working with an EMS provider.

Solution #2: Step into the global marketplace. Many Tier 3 EMS companies don’t appreciate they are operating within the global EMS community. Because they are, Tier 3 EMS firms should reach out to international competitors and engage in partnerships and affiliations. This will offer the potential OEM customers more features and services not traditionally found on the list of services.

Suggested avenues for Tier 3 firms to step into the global marketplace:

• Participate as an NPI and low-volume program generator for transfer to Tier 1s in North America, Asia or Europe. This function is the quickest way to generate new revenue and build an intriguing customer base for upstream Marketing programs. This subject matter has been addressed in detail through past articles and podcasts.^1,2
• Reach out to offshore EMS firms to become a facilitator of their business. Although offshore companies work independently from American service providers, there are local needs to facilitate, such as repair/replacement/refurbish services. Having product returned to offshore points of manufacture is economically unfeasible. Offshore companies are open to establish liaisons with North American EMS firms to provide these optional services. In addition, American OEMs are becoming more concerned about shipping product that may contain confidential information for repair to offshore countries. Having an American liaison perform such repairs will greatly reduce the concerns of the OEM customer and build new business for the Tier 3 EMS.
• Made in America is popular again. Yet, there are opportunities for offshore companies to conform to a portion of this agenda by converting products from, for instance, “Made in China” to “Assembled in USA.” This will give the OEM’s product shelf appeal to the end-consumer. As a Tier 3 EMS, converting products made offshore to Made in USA is not difficult. A general market promotional program, to both foreign EMS companies and OEMs, for the purposes of converting the origin of the product, has a lot of potential.
• As with the sales representative agreement, it is prudent to have all contracts with foreign EMS entities governed by the AAA.

Solution #3: Seek larger OEMs through new quoting methodologies. The expansion of a Tier 3 facility makes possible the opportunity to attract larger revenue programs. Success in a more competitive market requires transparency in the quoting process via “open book” unit price derivation practices. For some EMS firms, this is a painful and objectionable method. Yet, cost deviations throughout the EMS marketplace are relatively consistent. In fact, the experienced OEM decision-makers have a strong handle on market costs and EMS pricing efficacies. By displaying a true open book quotation, the OEM will grow comfortable and confident in the manifested parameters.

The bill of materials (BoM) is the most significant cost driver. Tier 3 EMS companies must work with the OEM to gain assistance in developing best-case component pricing scenarios. Developing a working relationship with a willing prospect can bring surprising quote results. There are various schemes in quoting, developing and service that will prove Tier 3s can gain material acquisition parity and provide global facilitation rivaling Tier 2 and Tier 1 firms.

It is wise for the Tier 3 EMS to keep the quotation construction somewhat fluid. That is, do not be tied to universal pricing worksheets. This author has witnessed great business opportunities lost by rigid quotation processes at the field level. Instead, quotation derivation is most effective when it reflects the status of the EMS, regarding the loading of excess capacity, the annual volume of the product(s), the utilization of available labor, material costs, internal cash flow, potential yield loss, and peripheral services that may be added as options, including outside services such as repair/replacement/refurbish, distribution and/or the increasing need to offer extended counterfeit detection screening. Fama addressed quotation worksheets in July 2014.³

Solution #4: Stay informed of the EMS industry crisis. Trending in the electronics manufacturing industry is the technical evolution and the frequency of counterfeit component invasions. All indications point to this crisis accelerated by component cloning, whereby knockoff parts are fabricated at the wafer fabrication level. Counterfeits are found in all end-products, from military to consumer. Counterfeiting is unquestionably a global epidemic, on a collision course with day-to-day EMS operations. This heightens not only the risk of field failures but also cybersecurity intrusions. It is wise for EMS companies, Tier 3s especially, to properly screen for counterfeits. Tier 3 EMSs must be active in preventing counterfeits from entering their supply chains. With this, a holistic program of counterfeit avoidance and detection is to be propositioned to potential customers. The measures to perform extensive component examination can be taken internally, or through third-party professional counterfeit mitigation companies. Having such options openly offered to potential customers will gain their confidence and respect. The cost of such detection activities is to be presented as optional and is to be accepted or declined by the customer. Cost for optional counterfeit detection services shall be added as a line item option to the formal quotation. (The subject of counterfeit components in EMS is addressed in detail here.¹)

Solution #5: Refresh promotion with new company brand. Having a new set of tools in place, the Tier 3 EMS can now restart its promotion. This time, the Tier 3 EMS is not just targeting those customers located in the general reachable sales territory. Instead, the promotion targets all the US and Canada. Essentially, the Tier 3 EMS now has the markings of a global company, albeit smaller than a Tier 1. Having multiple offshore partners and the ability to send or receive projects for production or facilitation on a worldwide basis, this fulfills most OEMs’ needs list today. Tier 3 EMSs can perform all tasks at competitive pricing and with speed and focus, which at times eclipses the best of the Tier 1 EMSs.

Summary

As the storyline goes, a successful Tier 3 company follows its long-term expansion plan. However, the plan is muddied by confines of the reachable sales territory. The same old services do not yield a new set of customers, and the results remain: The expanded factory sits underutilized indefinitely.  

It’s better to recognize the ever-changing globalization of the EMS industry. Understanding this, Tier 3s can upgrade their brand, become more active offshore, recognize global trends and join forces with the global EMS community. The new EMS pathway for Tier 3 EMSs includes expanding facilities and their spectrum of services via offshore alliances. A new wave of OEM customers attracted to the updated Tier 3 EMS brand will surface. To conclude, the ongoing success of Tier 3 EMSs is achieved based on the ability to embrace the needs of their customers, and, specifically, local-to-global EMS options.

References

Joseph Fama, “Attack of the Clones,” PCD&F/CIRCUITS ASSEMBLY, November 2017. circuitsassembly.com/ca/editorial/menu-features/28360-attack-of-the-clones-2.html
PCB Chat, vol. 1, no. 2, Oct. 23, 2017. upmg.podbean.com/e/pcb-chat-joe-fama/
Joseph Fama, “The Unit Price Worksheet,” PCD&F/CIRCUITS ASSEMBLY, July 2014. circuitsassembly.com/ca/features-itemid-fix/399-focus-on-business/24035-focus-on-business-1407.html

Joseph Fama is an EMS consultant with extensive experience in the global EMS marketplace, including 25 years with Singaporean, Chinese and American EMSs addressing global marketing agendas and business development; joefama@gmail.com.